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GM Sends Shivers Down Mad Ave

Plan to Slash Agency Fees More Than $20M Triggers Worry Others Will Follow

CHICAGO (AdAge.com) -- News that general Motors Corp., the country's No. 4 advertiser, intends to cut its agency fees by as much as 20% is stoking fears on Madison Avenue that others will follow.

"A lot of these companies think the same," said a former ad executive at a large package-goods marketer, noting that all major advertisers are looking at the same set of economic data.

Paired with an austerity push by megamarketers including Procter & Gamble Co. and Unilever, the slashing by GM, which spent $3 billion last year on total U.S. advertising, is a wake-up call to agencies that the recession may be tougher than anticipated.

"There's basically no organic growth out there," said Peter Krivkovich, CEO of independent agency Cramer-Krasselt, who added he has not seen any of his clients attempt to cut fees yet. "So you've got to cut because of that, and then if you have clients cutting [fees] in addition to that, you've got a double whammy."

Of course, when you lose $15 billion in a quarter, as GM did, the pressure to find those efficiencies is readily apparent, which is why the auto giant's agencies -- a group that includes Leo Burnett, Starcom, McCann Erickson, Modernista and Campbell Ewald -- claim they were not at all surprised to learn GM wanted to pare their compensation by as much as $20 million.

"We've been working with our partners for quite some time and asked them to work with us to eliminate low-value work and find creative solutions to go to market more efficiently," a GM spokeswoman said.

Forewarning
Indeed, agency executives said the automaker had for some time been alerting agencies that cutbacks were on the horizon, allowing them to take necessary measures, such as curtailing new hires, in order to prevent later bloodshed. They indicated staff reductions were not imminent, at least, with GM still in the process of ironing out new cost-structure expectations with each individual shop.

So who's next? Though a sweep of major marketers by Ad Age yielded no takers as yet, agency executives are betting that clients in similarly stressed industries such as financial services or airlines will attempt similar fee tweaks and spending cuts to weather a difficult business environment.

If enough clients are inspired to follow GM's fee lead, it could make what's already expected to be a tough 2009 even more difficult. Few experts are predicting improved economic conditions for next year, and comparisons will suffer with events such as the Beijing Olympics, the Euro 2008 soccer championships and the presidential election cycle all out of the picture.

"They're going to probably have to make some cuts and look at lower margins for a few years," said Larry Witt, who covers advertising and media companies for Morningstar.